THE
      SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIES
      HAVE BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS
      AMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE
      COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT
      SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES
      ACT
      OF 1933 OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES
      LAWS.

     

    10%
      SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE

     

    US
      $3,000,000.00                                          June
      30,
      2008

     

    FOR
      VALUE
      RECEIVED, National Holdings Corporation, a Delaware corporation (the
“Company”),
      hereby unconditionally promises to pay to the order of St. Cloud Capital
      Partners II, L.P. (the “Holder”),
      having an address at 10866 Wilshire Boulevard, Suite 1450, Los Angeles, CA
      90024, at such address or at such other place as may be designated in writing
      by
      the Holder, or its assigns, the aggregate principal sum of THREE MILLION AND
      00/100 UNITED STATES DOLLARS ($3,000,000.00) (the “Principal
      Amount”),
      together with interest on the unpaid principal balance of this Note outstanding
      at a rate equal to ten (10.0%) percent (computed on the basis of the actual
      number of days elapsed in a 365-day year) per annum and continuing on the
      outstanding principal until this 10% Senior Subordinated Convertible Promissory
      Note (the “Note”)
      is
      converted into Common Stock as provided herein or indefeasibly and irrevocably
      paid in full by the Company. Such interest shall be payable quarterly in arrears
      on the last day of March, June, September and December in each year. Subject
      to
      the other provisions of this Note, the Principal Amount of this Note and all
      accrued and unpaid interest hereon shall mature and become due and payable
      on
      the fourth (4th)
      anniversary of the date hereof (the “Stated
      Maturity Date”).
      Except as provided herein, all payments of principal and interest by the Company
      under this Note shall be made in United States dollars in immediately available
      funds to an account specified by the Holder.

     

    1. Definitions.
      Unless
      the context otherwise requires, when used herein the following terms shall
      have
      the meaning indicated:

     

    “Board”
shall
      mean the Board of Directors of the Company.

     

    “Business
      Day”
other
      than a Saturday, Sunday or holiday, on which banks in New York City are open
      for
      the general transaction of business.

     

    “Change
      of Control”
shall
      mean (i) any transaction or series of related transactions (including any
      reorganization, merger or consolidation) that results in the transfer of 50%
      or
      more of the outstanding voting power of the Company, or (ii) a sale of all
      or
      substantially all of the assets of the Company to another person, but shall
      not
      include the Company’s proposed merger with vFinance, Inc.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    “Company
      Mandated Conversion”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Company
      Mandated Conversion Date”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Company
      Mandated Conversion Notice”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Common
      Stock”
shall
      mean the common stock, par value $0.02 per share, of the Company.

     

    “Company”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Conversion
      Price”
shall
      mean initially $1.60 per share, subject to adjustment as provided in Section
      6. 

     

    “Exchange
      Act”
shall
      mean the Securities Exchange Act of 1934, as amended.

     

    “Event
      of Default”
shall
      have the meaning ascribed to such term in Section 7 herein.

     

    “First
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Holder”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Investor”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    “Market
      Price”
as
      of a
      particular date (the “Valuation Date”) shall mean the following: (a) if the
      Common Stock is then listed on a national stock exchange, the closing sale
      price
      of the Common Stock on such exchange on the last Trading Day prior to the
      Valuation Date, provided that if such security has not traded in the prior
      ten
      (10) trading sessions, the Market Price shall be the average closing bid price
      of such security in the most recent ten (10) trading sessions during which
      such
      security has traded; (b) if the Common Stock is then quoted on The Nasdaq Stock
      Market, Inc. (“Nasdaq”), the OTC Bulletin Board (the “Bulletin Board”) or such
      similar exchange or association, the closing sale price of the of Common Stock
      on Nasdaq, the Bulletin Board or such other exchange or association on the
      last
      Trading Day prior to the Valuation Date, provided that if such security has
      not
      traded in the prior ten (10) trading sessions, the Market Price shall be the
      average closing price of one share of such security in the most recent ten
      (10)
      trading sessions during which such security has traded; or (c) if the Common
      Stock is not then listed on a national stock exchange or quoted on Nasdaq,
      the
      Bulletin Board or such other exchange or association, the fair market value
      of
      the Common Stock as of the Valuation Date, shall be determined in good faith
      by
      the Board of Directors of the Company. If the Common Stock is not then listed
      on
      a national securities exchange, the Bulletin Board or such other exchange or
      association, the Board of Directors of the Company shall respond promptly,
      in
      writing, to an inquiry by the Holder as to the fair market value of a share
      of
      Common Stock as determined by the Board of Directors of the Company.



    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    


    “Material
      Adverse Effect”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    “Note”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Optional
      Conversion”
shall
      have the meaning ascribed to such term in Section 5(a) hereof.

     

    “Optional
      Conversion Notice”
shall
      have the meaning ascribed to such term in Section 5(a) hereof.

     

    “Options”
shall
      have the meaning ascribed to such term in Section 6 hereof.

     

    “Other
      Senior Debt”
shall
      have the meaning ascribed to such term in Section 3 hereof.

     

    “Person”
means
      an individual, corporation, partnership, limited liability company, trust,
      business trust, association, joint stock company, joint venture, sole
      proprietorship, unincorporated organization, governmental authority or any
      other
      form of entity not specifically listed herein.

     

    “Prepayment
      Notice”
shall
      have the meaning ascribed to such term in Section 7 hereof.

     

    “Purchase
      Agreement”
shall
      mean the Securities Purchase Agreement, dated as of June 30, 2008, and as that
      agreement may be amended from time to time, by and among the Company and the
      Investor.

     

    “Registration
      Rights Agreement”
shall
      mean the Registration Rights Agreement, dated as of June 30, 2008, and as that
      agreement may be amended from time to time, by and among the Company and the
      Investor.

     

    “Second
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Senior”
shall
      have the meaning ascribed to such term in Section 3 hereof.

     

    “Stated
      Maturity Date”
shall
      have the meaning ascribed to such term in the first paragraph
      herein.

     

    “Subsidiary”
of
      any
      Person means another Person, an amount of the voting securities, other voting
      ownership or voting partnership interests of which is sufficient to elect at
      least a majority of its Board of Directors or other governing body (or, if
      there
      are no such voting interests, 50% or more of the equity interests of which)
      is
      owned directly or indirectly by such first Person.

     

    “Third
      Tranche CMC”
shall
      have the meaning ascribed to such term in Section 5(b) hereof.

     

    “Trading
      Day”
means
      (i) if the relevant stock or security is listed or admitted for trading on
      The
      New York Stock Exchange, Inc. or any other national securities exchange, a
      day
      on which such exchange is open for business; (ii) if the relevant stock or
      security is quoted on Nasdaq, the Bulletin Board or any other system of
      automated dissemination of quotations of securities prices, a day on which
      trades may be effected through such system; or (iii) if the relevant stock
      or
      security is not listed or admitted for trading on any national securities
      exchange or quoted on the Nasdaq Stock Market or any other system of automated
      dissemination of quotation of securities prices, a day on which the relevant
      stock or security is traded in a regular way in the over-the-counter market
      and
      for which a closing bid and a closing asked price for such stock or security
      are
      available.


    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    


    “Transaction
      Documents”
shall
      have the meaning ascribed to such term in the Purchase Agreement.

     

    2. Purchase
      Agreement.
      This
      Note is subject to the terms and conditions of, and entitled to the benefit
      of,
      the provisions of the Purchase Agreement. This Note is transferable and
      assignable to any person to whom such transfer is permissible under the Purchase
      Agreement and applicable law. The Company agrees to issue from time to time
      a
      replacement Note in the form hereof to facilitate such transfers and
      assignments. In addition, after delivery of an indemnity in form and substance
      reasonably satisfactory to the Company, the Company also agrees to promptly
      issue a replacement Note if this Note is lost, stolen, mutilated or
      destroyed.

     

    3. Ranking.
      The
      indebtedness evidenced by this Note and the payment of the Principal Amount
      and
      interest thereof shall be Senior (as hereinafter defined) to, and have priority
      in right of payment over, all indebtedness for borrowed money of the Company,
      except for Other Senior Debt (as hereinafter defined). “Senior”
shall
      be deemed to mean that, in the event of any default in the payment of the
      obligations represented by this Note or of any liquidation, insolvency,
      bankruptcy, reorganization, or similar proceedings relating to the Company,
      all
      sums payable on this Note, shall first be paid in full, with interest, if any,
      before any payment is made upon any other indebtedness, except for Other Senior
      Debt, and, in any such event, any payment or distribution of any character
      which
      shall be made in respect of any other indebtedness of the Company, except for
      Other Senior Debt, shall be paid over to the holder of this Note for application
      to the payment hereof, unless and until the obligations under this Note (which
      shall mean the Principal Amount and other obligations arising out of, premium,
      if any, interest on, and any costs and expenses payable under, this Note) shall
      have been paid and satisfied in full. “Other
      Senior Debt”
shall
      be deemed to mean (i) those certain notes, in the aggregate principal amount
      of
      One Million ($1,000,000) Dollars dated February 22, 2007 issued to each of
      St.
      Cloud Capital Partners, L.P. ($250,000), Bedford Oaks Partners, L.P. ($250,000)
      and Christopher C. Dewey ($500,000), which shall rank pari
      passu with
      this
      Note, (ii) that certain note, in the principal amount of Three Million
      ($3,000,000) Dollars, dated March 31, 2008, issued to Investor and (iii) up
      to
      $1,000,000 of other senior indebtedness that may be incurred by the Company
      after the date hereof, some or all of which shall rank either pari
      passu with,
      or
      senior to, this
      Note.

     

    4. Right
      of Redemption.
      At the
      option of the Company, which may be exercised upon ten (10) business days notice
      to the Holder (“Notice
      of Redemption”)
      at any
      time or from time to time commencing June 30, 2009, this Note may be redeemed
      in
      whole or in part at redemption prices as follows: (i) 125% of the Principal
      Amount of this Note plus accrued and unpaid interest through the date of
      redemption if the Notice of Redemption is delivered between June 30, 2009 and
      June 30, 2010, (ii) 145% of the Principal Amount of this Note plus accrued
      and
      unpaid interest through the date of redemption if the Notice of Redemption
      is
      delivered between June 30, 2010 and June 30, 2011, (iii) 165% of the Principal
      Amount of this Note plus accrued and unpaid interest through the date of
      redemption if the Notice of Redemption is delivered between June 30, 2011 and
      June 30, 2012. Within five (5) business days following the full payment of
      the
      redemption price, the Holder shall deliver to the Company the Note so redeemed.
      Holder shall do all further acts and things and execute all further documents
      reasonably required in the circumstances to effect the provisions of this
      Section 4. 


    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    


    5. Conversion
      Rights.

    


    (a) Optional
      Conversion.

     

    (i) Subject
      to and upon compliance with the provisions of this Note, the Holder shall have
      the right, at its option at any time prior to the Stated Maturity Date, to
      convert some or all of the Note into such number of fully paid and nonassessable
      shares of Common Stock as is obtained by: (a) adding (i) the Principal Amount
      to
      be converted and (ii) the amount of any accrued but unpaid interest with respect
      to such portion of this Note to be converted; and (b) dividing the result
      obtained pursuant to clause (a) above by the Conversion Price then in effect.
      The rights of conversion set forth in this Section 5 shall be exercised by
      the
      Holder by completing and executing the notice of conversion attached to this
      Note as Exhibit
      A (“Optional
      Conversion Notice”)
      and by
      surrender of this Note (or, in lieu thereof, by delivery of an appropriate
      lost
      security affidavit in the event this Note shall have been lost or destroyed)
      to
      the Company at its principal office (or such other office or agency of the
      Company as the Company may designate by notice in writing to the Holder),
      together with a statement of the name or names (with address) in which the
      certificate or certificates for shares of Common Stock shall be
      issued.

     

    (ii) Promptly
      after receipt of the Optional Conversion Notice and surrender of this Note,
      the
      Company shall issue and deliver, or cause to be issued and delivered, to the
      Holder, registered in such name or names as the Holder may direct in writing,
      a
      certificate or certificates for the number of whole shares of Common Stock
      issuable upon the conversion of such portion of this Note. Such conversion
      shall
      be deemed to have been effected, and the Conversion Price shall be determined,
      as of the close of business on the date on which Optional Conversion Notice
      shall have been received by the Company and this Note shall have been
      surrendered as aforesaid, and at such time, the rights of the Holder shall
      cease
      with respect to the Principal Amount and accrued interest being converted,
      and
      the Person or Persons in whose name or names any certificate or certificates
      for
      shares of Common Stock shall be issuable upon such conversion shall be deemed
      to
      have become the holder or holders of record of the shares represented
      thereby.

     

    (iii) No
      fractional shares shall be issued upon any Optional Conversion of this Note
      into
      Common Stock. If any fractional share of Common Stock would, except for the
      provisions of the first sentence of this Section 5(a)(iii), be delivered upon
      such conversion, the Company, in lieu of delivering such fractional share,
      shall
      pay to the Holder an amount in cash equal to the Market Price of such fractional
      share of Common Stock. In case the Principal Amount exceeds the Principal Amount
      being converted as set forth in the Optional Conversion Notice, the Company
      shall, upon such conversion, execute and deliver to the Holder, at the expense
      of the Company, a new Note for the Principal Amount surrendered which is not
      to
      be converted.


    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    


    (b) Company
      Mandated Conversion.

     

    (i) At
      the
      option of the Company, this Note shall be convertible (“Company
      Mandated Conversion”)
      into
      such number of fully paid and nonassessable shares of Common Stock as is
      obtained by: (a) adding (i) the applicable percentage (referenced below) of
      outstanding Principal Amount and (ii) the amount of any accrued but unpaid
      interest on such Principal Amount; and (b) dividing the result obtained pursuant
      to clause (a) above by the Conversion Price then in effect, provided, however,
      that
      the Company may only effect a Company Mandated Conversion commencing June 30,
      2009 and
      provided further that the
      following conditions are satisfied: 

     

    (A)
      If
      the Company Mandated Conversion Notice (as defined below) is delivered between
      June 30, 2009 and June 30, 2012, thirty-three (33%) percent of the outstanding
      Principal Amount plus any accrued but unpaid interest shall be subject to
      Company Mandated Conversion (“First
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 187.5% of the Conversion Price
      for the twenty two (22) consecutive Trading Days immediately prior to the
      Company Mandated Conversion Notice and (ii) the average daily trading volume
      during such trading period equals or exceeds 50,000 shares; 

     

    (B)
      If
      the Company Mandated Conversion Notice is delivered between June 30, 2010 and
      June 30, 2012, thirty-three (33%) percent of the initial outstanding Principal
      Amount plus any accrued but unpaid interest shall be subject to Company Mandated
      Conversion (“Second
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 250% of the Conversion Price
      for
      the twenty (20) consecutive Trading Days immediately prior to the Company
      Mandated Conversion Notice and (ii) the average daily trading volume during
      such
      trading period equals or exceeds 40,000 shares; 

     

    (C)
      If
      the Company Mandated Conversion Notice is delivered between June 30, 2011 and
      June 30, 2012, thirty-four (34%) percent of the initial outstanding Principal
      Amount plus any accrued but unpaid interest shall be subject to Company Mandated
      Conversion (“Third
      Tranche CMC”)
      if (i)
      the closing price of the Common Stock on the principal exchange or market on
      which it is then traded has equaled or exceeded 312.5% of the Conversion Price
      for the twenty (20) consecutive Trading Days immediately prior to the Company
      Mandated Conversion Notice and (ii) the average daily trading volume during
      such
      trading period equals or exceeds 35,000 shares.

     

    Notwithstanding
      the foregoing, the Company may not effectuate a Second Tranche CMC during the
      applicable period if the First Tranche CMC had not been previously consummated
      and, similarly, may not effectuate a Third Tranche CMC during the applicable
      period if the First Tranche CMC and Second Tranche CMC had not been previously
      consummated. 

    


    (ii)
      The
      Company shall provide written notice of the Company Mandated Conversion within
      five (5) business days following the satisfaction of the applicable conditions
      (“Company
      Mandated Conversion Notice”).
      The
      Company Mandated Conversion Notice shall include the effective date of the
      Company Mandated Conversion (“Company
      Mandated Conversion Date”).
      Promptly after the Company Mandated Conversion Date, the Holder of this Note
      shall deliver this Note (or, in lieu thereof, an appropriate lost security
      affidavit in the event this Note shall have been lost or destroyed) to the
      Company at its principal office (or such other office or agency of the Company
      as the Company may designate by notice in writing to the Holder), together
      with
      a statement of the name or names (with address) in which the certificate or
      certificates for shares of Common Stock shall be issued. Promptly following
      the
      surrender of this Note as aforesaid, the Company shall issue and deliver, or
      cause to be issued and delivered, to the Holder, registered in such name or
      names as the Holder may direct in writing, a certificate or certificates for
      the
      number of whole shares of Common Stock issuable upon the conversion of this
      Note. Such conversion shall be deemed to have been effected (irrespective of
      Holder’s cooperation with respect to the foregoing) as of the close of business
      on the Company Mandated Conversion Date, and at such time, the rights of the
      Holder shall cease with respect to the Note being converted, and the Person
      or
      Persons in whose name or names any certificate or certificates for shares of
      Common Stock shall be issuable upon such conversion shall be deemed to have
      become the holder or holders of record of the shares represented thereby. No
      fractional shares shall be issued upon any Company Mandated Conversion of this
      Note into Common Stock. The Company, in lieu of delivering such fractional
      share, shall pay to the Holder an amount in cash equal to the Market Price
      of
      such fractional share of Common Stock.



    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    


    6. Adjustment
      to Conversion Price.

    


    (a) If
      the
      Company shall, at any time or from time to time while existing obligations
      under
      the Note remain outstanding, pay a dividend or make a distribution on its Common
      Stock in shares of Common Stock, subdivide its outstanding shares of Common
      Stock into a greater number of shares or combine its outstanding shares of
      Common Stock into a smaller number of shares or issue by reclassification of
      its
      outstanding shares of Common Stock any shares of its capital stock (including
      any such reclassification in connection with a consolidation or merger in which
      the Company is the continuing corporation), then the Conversion Price in effect
      immediately prior to the date upon which such change shall become effective,
      shall be adjusted by the Company so that the Holder thereafter converting this
      Note shall be entitled to receive the number of shares of Common Stock or other
      capital stock which the Holder would have received if the Note had been
      converted immediately prior to such event upon payment of a Conversion Price
      that has been adjusted to reflect a fair allocation of the economics of such
      event to the Holder, without regard to any conversion limitation specified
      in
      this Section 6. Such adjustments shall be made successively whenever any event
      listed above shall occur.

     

    (b) If
      any
      capital reorganization, reclassification of the capital stock of the Company,
      consolidation or merger of the Company with another corporation in which the
      Company is not the survivor, or sale, transfer or other disposition of all
      or
      substantially all of the Company’s assets to another corporation shall be
      effected, then, as a condition of such reorganization, reclassification,
      consolidation, merger, sale, transfer or other disposition, lawful and adequate
      provision shall be made whereby the Holder shall thereafter have the right
      to
      purchase and receive upon the basis and upon the terms and conditions herein
      specified and in lieu of the shares of Common Stock immediately theretofore
      issuable upon conversion of this Note, without regard to any conversion
      limitation specified in Section 6, such shares of stock, securities or assets
      as
      would have been issuable or payable with respect to or in exchange for a number
      of shares of Common Stock equal to the number of shares of Common Stock
      immediately theretofore issuable upon conversion of this Note, had such
      reorganization, reclassification, consolidation, merger, sale, transfer or
      other
      disposition not taken place, without regard to any conversion limitation
      specified in Section 6, and in any such case appropriate provision shall be
      made
      with respect to the rights and interests of the Holder to the end that the
      provisions hereof (including, without limitation, provision for adjustment
      of
      the Conversion Price) shall thereafter be applicable, as nearly equivalent
      as
      may be practicable in relation to any shares of stock, securities or assets
      thereafter deliverable upon the conversion hereof. The Company shall not effect
      any such consolidation, merger, sale, transfer or other disposition unless
      prior
      to or simultaneously with the consummation thereof the successor corporation
      (if
      other than the Company) resulting from such consolidation or merger, or the
      corporation purchasing or otherwise acquiring such assets or other appropriate
      corporation or entity shall assume the obligation to deliver to the Holder,
      at
      the last address of the Holder appearing on the books of the Company, such
      shares of stock, securities or assets as, in accordance with the foregoing
      provisions, the Holder may be entitled to purchase, without regard to any
      conversion limitation specified in Section 6, and the other obligations under
      this Note. The provisions of this Section 6(b) shall similarly apply to
      successive reorganizations, reclassifications, consolidations, mergers, sales,
      transfers or other dispositions.


    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    


    (c) In
      case
      the Company shall fix a payment date for the making of a distribution to all
      holders of Common Stock (including any such distribution made in connection
      with
      a consolidation or merger in which the Company is the continuing corporation)
      of
      evidences of indebtedness or assets (other than cash dividends or cash
      distributions payable out of consolidated earnings or earned surplus or
      dividends or distributions referred to in Section 6(a)), or subscription rights
      or warrants, the Conversion Price to be in effect after such payment date shall
      be determined by multiplying the Conversion Price in effect immediately prior
      to
      such payment date by a fraction, the numerator of which shall be the total
      number of shares of Common Stock outstanding multiplied by the Market Price
      of
      Common Stock immediately prior to such payment date, less the fair market value
      (as determined by the Board of Directors in good faith) of said assets or
      evidences of indebtedness so distributed, or of such subscription rights or
      Notes, and the denominator of which shall be the total number of shares of
      Common Stock outstanding multiplied by such Market Price immediately prior
      to
      such payment date. Such adjustment shall be made successively whenever such
      a
      payment date is fixed.

     

    (d) An
      adjustment to the Conversion Price shall become effective immediately after
      the
      payment date in the case of each dividend or distribution and immediately after
      the effective date of each other event which requires an
      adjustment.

     

    (e) In
      the
      event that, as a result of an adjustment made pursuant to this Section 6, the
      Holder shall become entitled to receive any shares of capital stock of the
      Company other than shares of Common Stock, the number of such other shares
      so
      receivable upon conversion of this Note shall be subject thereafter to
      adjustment from time to time in a manner and on terms as nearly equivalent
      as
      practicable to the provisions contained in this Note.


    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    


    (f) In
      case
      at any time:

     

    (i) the
      Company shall declare any dividend upon its Common Stock payable in stock or
      make any other distribution to the holders of its Common Stock;

     

    (ii) the
      Company shall offer for subscription pro rata
      to the
      holders of its Common Stock any additional shares of Common Stock;
      or

     

    (iii) there
      shall be any capital reorganization or reclassification of the capital stock
      of
      the Company, any acquisition or a liquidation, dissolution or winding up of
      the
      Company;

     

    then,
      in
      any one or more of said cases, the Company shall give, by delivery in person
      or
      by certified or registered mail, return receipt requested, addressed to the
      Holder at the address of such Holder as shown on the books of the Company,
      (a)
      at least twenty (20) Business Days’ prior written notice of the date on which
      the books of the Company shall close or a record shall be taken for such
      dividend, distribution or subscription rights or for determining rights to
      vote
      in respect of any event set forth in clause (iii) of this Section 6(f) and
      (b)
      in the case of any event set forth in clause (iii) of this Section 6(f), at
      least twenty (20) Business Days’ prior written notice of the date when the same
      shall take place. Such notice in accordance with the foregoing clause (a) shall
      also specify, in the case of any such dividend, distribution or subscription
      rights, the date on which the holders of Common Stock or such other class or
      series of capital stock shall be entitled thereto and such notice in accordance
      with the foregoing clause (b) shall also specify the date on which the holders
      of Common Stock and such other series or class of capital stock shall be
      entitled to exchange their Common Stock and other stock for securities or other
      property deliverable upon consummation of the applicable event set forth in
      clause (iii) of this Section 6(f).

     

    (g) Upon
      any
      adjustment of the Conversion Price, then and in each such case the Company
      shall
      give prompt written notice thereof, by delivery in person or by certified or
      registered mail, return receipt requested, addressed to the Holder at the
      address of such Holder as shown on the books of the Company, which notice shall
      state the Conversion Price resulting from such adjustment and setting forth
      in
      reasonable detail the method upon which such calculation is based.

     

    (h) The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock, solely for the purpose of issuance upon conversion of this Note
      as
      herein provided, such number of shares of Common Stock as shall then be issuable
      upon the conversion of this Note. The Company covenants that all shares of
      Common Stock which shall be so issued shall be duly and validly issued and
      fully
      paid and nonassessable, and free from all taxes, liens and charges with respect
      to the issue thereof, and, without limiting the generality of the foregoing,
      and
      that the Company will from time to time take all such action as may be requisite
      to assure that the par value per share of the Common Stock is at all times
      equal
      to or less than the Conversion Price in effect at the time. The Company shall
      not take any action which results in any adjustment of the Conversion Price
      if
      the total number of shares of Common Stock issued and issuable after such action
      upon conversion of this Note would exceed the total number of shares of Common
      Stock then authorized by the Company’s Certificate of
      Incorporation.


    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    


    (i) The
      issuance of certificates for shares of Common Stock upon conversion of this
      Note
      shall be made without charge to the holders thereof for any issuance tax in
      respect thereof, provided that the Company shall not be required to pay any
      tax
      which may be payable in respect of any transfer involved in the issuance and
      delivery of any certificate in a name other than that of the
      Holder.

     

    (j) The
      Company will not at any time close its transfer books against the transfer,
      as
      applicable, of this Note or of any shares of Common Stock issued or issuable
      upon the conversion of this Note in any manner which interferes with the timely
      conversion of this Note, except as may otherwise be required to comply with
      applicable securities laws.

     

    7. Prepayment.
      

    


    (a) Upon
      the
      occurrence of a Change of Control, this Note shall be automatically due and
      payable. In the event of a Change of Control or any prepayment, whether partial
      or in full, the Company will give the Lender not less than fifteen (15) calendar
      days prior written notice, and during such fifteen (15) day period, Lender
      shall
      be entitled to exercise its optional conversion feature.
      

    


    (b) Upon
      the
      death of Mark Goldwasser, the Company’s President and Chief Executive Officer,
      or his removal from his position without the consent of Lender, the Holder
      shall
      have the right to demand immediate prepayment of this Note by delivering a
      written notice to the Company (“Prepayment Notice”) within thirty (30) days of
      its receipt of written notice of such death or removal from office. The Company
      shall have 120 days from the date of the Company’s receipt of the Prepayment
      Notice to make full prepayment of this Note.

    


    8. Event
      of Default.
      The
      occurrence of any of following events shall constitute an “Event
      of Default”
      hereunder:

    


    (a) the
      failure by the Company to perform or observe in any material respect any
      material covenant or agreement of the Company contained in the Purchase
      Agreement, which remains uncured for a period of five (5) business days from
      the
      date the Company is notified in writing of such default; or

     

    (b) any
      representation or warranty made by the Company under any of the Transaction
      Documents was, when made, untrue or misleading, the result of which is
      reasonably likely to have a Material Adverse Effect;

     

    (c) the
      failure of the Company to make any payment of principal or interest on this
      Note
      when due, whether at maturity, upon acceleration or otherwise and the
      continuation of such failure for a period of five (5) business days following
      written notice;

     

    (d) there
      shall have occurred an acceleration of the stated maturity of any indebtedness
      for borrowed money of the Company (other than the Note) of One Hundred Thousand
      United States Dollars ($100,000) or
      more
      in aggregate principal amount (which acceleration is not rescinded, annulled
      or
      otherwise cured within fifteen (15) business days of receipt by the Company
      of
      notice of such acceleration);


    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    


    (e) the
      Company makes an assignment for the benefit of creditors or admits in writing
      its inability to pay its debts generally as they become due; or an order,
      judgment or decree is entered adjudicating the Company as bankrupt or insolvent;
      or any order for relief with respect to the Company is entered under the Federal
      Bankruptcy Code or any other bankruptcy or insolvency law; or the Company
      petitions or applies to any tribunal for the appointment of a custodian,
      trustee, receiver or liquidator of the Company or of any substantial part of
      the
      assets of the Company, or commences any proceeding relating to it under any
      bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
      dissolution or liquidation law of any jurisdiction; or any such petition or
      application is filed, or any such proceeding is commenced, against the Company
      and either (i) the Company by any act indicates its approval thereof, consents
      thereto or acquiescence therein or (ii) such petition application or proceeding
      is not dismissed within sixty (60) days; or 

     

    (f) a
      final,
      non-appealable judgment which, in the aggregate with other outstanding final
      judgments against the Company and its Subsidiaries, exceeds Two Hundred Thousand
      United States Dollars ($200,000) shall be rendered against the Company or a
      Subsidiary and within sixty (60) days after entry thereof, such judgment is
      not
      discharged or execution thereof stayed pending appeal, or within sixty (60)
      days
      after the expiration of such stay, such judgment is not discharged.

     

    Upon
      the
      occurrence of any such Event of Default all unpaid principal and accrued
      interest under this Note shall become immediately due and payable (A) upon
      election of the Holder, with respect to (a), (b), (c), (d) and (f), and (B)
      automatically, with respect to (e). Upon the occurrence of an Event of Default,
      the Holder shall have the right to exercise any other right, power or remedy
      as
      may be provided herein. Upon
      the occurrence of an Event of Default, the rate of interest on the unpaid
      principal shall be increased to fourteen percent (14%), or such lower rate
      that
      is the maximum rate allowed by law, from the date of such Event Default until
      such unpaid principal is repaid in full.

     

    9. Registration
      Rights.
      The
      Holder shall be entitled to the rights set forth under the Registration Rights
      Agreement to allow for the registration of the resale of the Common Stock
      issuable upon conversion of this Note under the Securities Act of 1933, as
      amended.

     

    10. No
      Waiver.
      No
      delay or omission on the part of the Holder in exercising any right under this
      Note shall operate as a waiver of such right or of any other right of the
      Holder, nor shall any delay, omission or waiver on any one occasion be deemed
      a
      bar to or waiver of the same or any other right on any future
      occasion.

     

    11. Amendments
      in Writing.
      None of
      the terms or provisions of this Note may be excluded, modified or amended except
      by a written instrument duly executed by the Holder and the Company expressly
      referring to this Note and setting forth the provision so excluded, modified
      or
      amended.


    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    


    12. Waivers.
      The
      Company hereby forever waives presentment, demand, presentment for payment,
      protest, notice of protest, notice of dishonor of this Note and all other
      demands and notices in connection with the delivery, acceptance, performance
      and
      enforcement of this Note.

     

    13. Waiver
      of Jury Trial.
      THE
      COMPANY HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
      ARISING OUT OF OR BASED UPON THIS NOTE OR ANY CONTEMPLATED TRANSACTION,
      INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THE COMPANY
      HAS
      REVIEWED THIS WAIVER WITH ITS COUNSEL.

     

    14. Governing
      Law; Consent to Jurisdiction.
      This
      Note shall be governed by and construed under the law of the State of New York,
      without giving effect to the conflicts of law principles thereof. The Company
      and, by accepting this Note, the Holder, each irrevocably submits to the
      exclusive jurisdiction of the courts of the State of New York located in New
      York County and the United States District Court for the Southern District
      of
      New York for the purpose of any suit, action, proceeding or judgment relating
      to
      or arising out of this Note and the transactions contemplated hereby. Service
      of
      process in connection with any such suit, action or proceeding may be served
      on
      each party hereto anywhere in the world by the same methods as are specified
      for
      the giving of notices under this Note. The Company and, by accepting this Note,
      the Holder, each irrevocably consents to the jurisdiction of any such court
      in
      any such suit, action or proceeding and to the laying of venue in such court.
      The Company and, by accepting this Note, the Holder, each irrevocably waives
      any
      objection to the laying of venue of any such suit, action or proceeding brought
      in such courts and irrevocably waives any claim that any such suit, action
      or
      proceeding brought in any such court has been brought in an inconvenient
      forum.

     

    15. Costs.
      If
      action is instituted to collect on this Note, the Company promises to pay all
      costs and expenses, including reasonable attorney’s fees, incurred in connection
      with such action.

     

    16. Notices.
      All
      notices hereunder shall be given in writing and shall be deemed effectively
      given in accordance with the provisions of Section 10.4 of the Purchase
      Agreement.

     

    17. Successors
      and Assigns.
      This
      Note shall be binding upon the successors or assigns of the Company and shall
      inure to the benefit of the successors and assigns of the
      Holder.


     

    
      	
              NATIONAL
                HOLDINGS CORPORATION

            
	 
	
              By:

            	
              /S/
                MARK GOLDWASSER

            
	 	
              Mark
                Goldwasser 

            
	 	
              President
                and Chief Executive Officer

            


    


    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    


    EXHIBIT
      A

     

    NOTICE
      OF
      CONVERSION

     

    OF

     

    10%
      SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE 

     

    
      	TO:	
              NATIONAL
                HOLDINGS CORPORATION 

            


    

     

    Pursuant
      to the 10% Senior Subordinated Convertible Promissory Note (the “Note”),
      attached hereto, dated June 30, 2008, issued by National Holdings Corporation,
      a
      Delaware corporation (the “Company”), to the undersigned (the “Holder”), the
      Holder hereby:

     

    Irrevocably
      elects to convert the principal and accrued interest under the Note into the
      Company’s Common Stock, in the amount of ________________ Dollars
      ($___________)(in the event no amount is specified, the entire principal and
      accrued interest outstanding under the Note shall be converted);

     

    Requests
      that a certificate for the Common Stock be issued in the name of undersigned,
      or, in the name and address of another person (the “Assignee”) are specified
      below provided, that, if the Conversion Shares are not covered by a registration
      statement effective under the Securities Act of 1933, the Assignee shall deliver
      a representation letter in form satisfactory to the Company:

     

    
      	
               

            
	
               

            
	
               

            
	
               

            
	
              (Name
                and address of person other than undersigned in whose name Common
                Stock
                are to be registered).

            


    

    


    Requests
      that, if the entire principal and accrued interest outstanding is not hereby
      converted into Common Stock, a new Note of like tenor for the remaining
      outstanding balance be issued and delivered to the undersigned at the address
      stated below.

     

    
      	
              Dated:                                         
                             
                          
                      
                           

            	 	
               

            
	 	 	
              Signature

            
	
              (This
                signature must conform in all respects to the name of the Holder
                as
                specified on the face of the Note.)

            
	 	 	 
	
               

            	 	
               

            
	
              Social
                Security Number

            	 	
              Printed
                Name

            
	 	 	 
	
              Address:                                      
                                           
                              

            	 	 
	 	 	 
	
               

            	 	 


    


    
      
        
        

      

      
        -13-